Jewelry Retailers May Miss Analysts Expectations

Implications: Unity's Confidence Index may not be the best indicator of luxury spending, but other evidence suggests consumers are  spending less on high-end items like jewelry.   If so, turn around companies like Zale and Finlay may be in jeopardy, while Tiffany and Blue Nile could miss the low end of analysts expectations.

Analysis: Sales of jewelry and watches have out performed the growth in retail sales for 2007. Growing about 6.5% in 2006, year to date jewelry sales were about 4.4% through August 2007. That growth rate was expected to remain about the same during the all important 4^th quarter; ranging from 3.8% to 4.0%. However, those projections may be optimistic if the demand for luxury goods declines as some research may now suggest.

In the $65 billion jewelry industry, sales haven't increased equally for all formats.  In particular, the high-end jewelry segment has outperformed all others. While the breakdown by format isn’t known exactly, jewelry sales for mass merchandisers at the low end have been flat to negative. Middle market jewelry chains have experienced underlying growth between 2.0% to 3.0%, while many fine jewelers have experienced double digit sales increases. Those trends contradict Unity Marketing's Luxury Consumption Index, raising the question of just how good the 'index' is at predicting the sales jewelry and other luxury items.

According to Retail Merchandiser, Unity’s proprietary luxury index “tanked” in the third quarter; falling to 87.3 the lowest since 2004. This decline followed a smaller decrease in the index during the second quarter of 2007. But just how predictive the Luxury Index is remains to be proven. Jewelry sales were robust in 2004, the last year the index reached this level. In fact, jewelry sales growth in 2004 was the second highest in the 1996-2006 period. However, subsequent industry growth declined to 3.8% in 2005, before rebounding to 6.5% in 2006.

For 2007, Unity points to the quarter over quarter decline in luxury spending when they say, “The amount spent by affluent consumers on luxury dropped 21 percent” from an average of $15,283 in the second quarter to $12,142" in the third quarter of 2007. But quarter over quarter declines isn’t necessarily the best indication of change in trends.

Consumer confidence measures have always been problematic when used to predict actual buying behavior. Statistically, there isn’t any definitive study that demonstrates a consistent relationship between sales decreases and declines in consumer confidence. In fact, there are consumer behavior models which predict sales of luxury items, like jewelry, actually increase when consumer confidence drops.  The best explanation is that during times of declining confidence, consumers feel better when they "treat" themselves to something special like jewelry or similar luxury items.

Just what Unity's luxury index actually measures or how rigorous their methodology is unclear.  However, stock prices of high-end jewelers like Blue Nile and Tiffany have recently decreased from second quarter highs on reports of reduced transactions during the third quarter. These jewelers will announce their sales results during the first full week in November. 

If they are below expectations, as some analysts believe, it means 4th quarter jewelry sales could be much weaker than forecast.  This would significantly reduce the profitability of jewelers which often earn 90% or more of their earnings in the last quarter of the year.  It could also be a calamity for Zale Corporation that is in the midst of its third turn around attempt in as many years, as well as, Finlay Enterprises which just purchased 75 high-end, Bailey, Banks, and Biddle stores for about $200 million.

Regardless, there's little evidence to suggest Unity's Luxury Confidence Index is a reliable predictor of luxury sales.  At least not yet.